Slow Trade: Structural and Cyclical Factors in Global Trade Slowdown

Global trade growth has slowed down since the global financial crisis in 2008 and has been below the global GDP growth rate. This sluggish growth of global trade, the so-called "Slow Trade," has been remarkable in emerging economies and for capital, intermediate, and consumer durable goods. There are three main backgrounds of this global trade slowdown: (1) a decline in the global real GDP growth, (2) a structural decline in the long-run income elasticity of trade due to changes in the global demand structure, expanding in-house production in China, and deceleration in the expansion of global value chains, and (3) short-term negative shocks. Our quantitative analysis indicates that structural factors such as declines in global potential output growth and in the long-run income elasticity of trade explain about 70 percent of the global trade slowdown, and cyclical factors such as remaining negative output gap and temporary negative shocks explain the rest, about 30 percent. It is unlikely that the part of the slowdown caused by structural factors will be immediately restored, while the negative impact of cyclical factors is expected to gradually become smaller. Our empirical result indicates that the current estimate of the long-run income elasticity of trade is about 1.0, which implies that the growth rate of global trade is expected to recover up to the growth rate of global real GDP. However, there still remain large uncertainties in terms of global trade, such as the economic relationship between the United Kingdom and the European Union and the development of rebalancing in emerging countries, and thus the effects of those uncertainties on global trade should be noted.